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Group company/subsidiary risk

1. What might be the impact if subsidiaries/business operations are located in a risk member state?

The main risk is that if a company relies on euro-denominated income from its subsidiary or business operations in the risk member state, the value of the income may fall if it is redenominated from euro into a new local currency. If exchange controls are introduced, the amount of cross-border payments that a subsidiary or business operations in a risk member state can make may be restricted, leading to a shortfall for the company. For further details, see the sections on Redenomination risk, Currency Mismatch risk andExchange and Capital Control risk.

2. Might there be intercompany debt issues?

The risk to inter-company debt arrangements will depend on the currency in which the debt is denominated. It may be possible to agree to restructure the arrangements to mitigate redenomination risk. However, if a subsidiary or the company's business operations receive payment primarily in euro, and euro obligations are redenominated into a new local currency, there is likely to be a revenue shortfall. If exchange controls are introduced, a subsidiary or business operations in a risk member state may be restricted as to the amount of cross-border payments that can be made. For further details, see the sections on Redenomination risk,Contracts risk, Exchange and Capital Control risk, Counter-party risk, Currency Mismatch risk and Revenue risk.

3. Might business assets be at risk?

The business may have provided security for its own obligations, repayment of which depends on revenue from operations in a risk member state. It may also have provided a guarantee of the obligations of a subsidiary in a risk member state. In either case, a revenue shortfall following redenomination may result in those obligations not being met, and the guarantee and any security over the company's assets being enforced. If a counterparty is unable to enforce a judgment against a subsidiary in a risk member state, the counterparty may be entitled to make a call under a guarantee. For further details, see the sections onRedenomination risk, Contracts risk, Revenue risk, Asset risk, Currency Mismatch risk and Enforcement risk.

4. Might operations be severely impacted or restricted by any legislation brought into force following a member state exit?

Operations that rely on making cross-border payments in euro (for example, purchasing materials or meeting credit obligations) are likely to be severely affected by legislation redenominating payment obligations into a new local currency. The new local currency is likely to fall in value compared with the euro, leading to a shortfall in revenue available to make payments. The shortfall would be exacerbated by exchange control restrictions applied to cross-border payments. The impact on domestic payment obligations would theoretically be less, but difficulty in meeting cross-border obligations would almost certainly have a secondary effect on the ability to make domestic payments in the new local currency. For further details, see the sections on Redenomination risk, Revenue risk, Currency Mismatch risk, Exchange and Capital Control risk, Legislation risk and Contracts risk.